Equities expected to outperform bonds

Public equity markets are forecast to post returns between 7.5% and 8%, while alternative asset classes are expected to post returns between 5% (real estate and diversified hedge funds) and 7.5% (private equities) in 2015.

Meanwhile, fixed income returns are expected to be very low for 2015 (1.5% for the FTSE TMX Canada Universe Index and 0.9% for the FTSE TMX Canada Long Bond Index) and will trail the anticipated rate of Canadian inflation (1.9%).

Managers think emerging and international equity markets are expected to outperform Canadian and U.S. markets. Few managers expect negative returns from equities in 2015 and no manager expects negative returns from the U.S. or emerging market indexes.

“Equity markets performed well in 2014 and had a positive impact on Canadian pension plans, as did the falling Canadian dollar on foreign asset returns,” says Diane Alalouf, investments leader for Eastern Canada.

“This was great news for most DC members but unfortunately was insufficient to offset the negative impact of the level of long-term interest rates for DB sponsors, which skimmed 60-year lows at the end of 2014,” she adds.

The Mercer Pension Health Index, which tracks the solvency financial position of a hypothetical DB plan, fell from 106% at the end of 2013 to 95% at the end of 2014.

The asset classes that managers are most likely to see increase in allocations include emerging markets (65%), infrastructure (62%), global equities (62%) and low-volatility equities (55%). Only 8% of managers expect allocations to Canadian large cap equities to increase.